Professional Documents
Culture Documents
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CONCEPT RELEASE ON AUDIT QUALITY
INDICATORS
NOTICE OF ROUNDTABLE
Summary:
Public
Comment:
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I.
Gregory J. Jonas, Director, Office of Research and Analysis (202/5914320, jonasg@pcaobus.org), Stephen Kroll, Senior Advisor, Office of
Research and Analysis (202/591-4369, krolls@pcaobus.org), and George
Wilfert, Deputy Director, Office of Research and Analysis (949/435-7734,
wilfertg@pcaobus.org).
Introduction
Pub. L. No. 107-204, 116 Stat. 745 (2002). In addition to the direct
responsibilities given to the Board in Sarbanes-Oxley, the statute specifically authorizes
the Board to act "to promote high professional standards among, and improve the
quality of audit services offered by," accounting firms registered with the Board "in order
to protect investors, or to further the public interest." Sarbanes-Oxley Section 101(c)(5)
of the Sarbanes-Oxley Act, 15 U.S.C. 7211(c)(5).
2
Under Sarbanes-Oxley, the Board oversees the audits of both public companies
and non-public brokers and dealers in securities. 4 The AQI project focuses on the
audits of public companies. An independent audit committee of the board of directors of
each public company 5 listed on a U.S. national securities exchange or association is
responsible for the appointment, compensation, and oversight of the work of the auditor
of that company's financial statements. 6 The shareholders of most listed and non-listed
public companies are asked to ratify the selection of their companies' respective
auditors. And investors, in considering their companies' financial condition, look to the
"preparation of informative, accurate, and independent audit reports." 7 The goal of the
AQI project is to improve the ability of persons to evaluate the quality of audits in which
they are involved or on which they rely and to enhance discussions among interested
parties; use of the indicators may also stimulate competition by audit firms based on
quality. The indicators proposed in this release are not put forward to modify, or to
suggest modification of, the objective of the audit of financial statements, or to impose
new audit performance requirements.
The 2008 Final Report of the Advisory Committee on the Auditing Profession to
the U.S. Department of the Treasury (the "Treasury Advisory Committee," sometimes
also called "ACAP") recommended that the Board, in consultation with other parties,
"determine the feasibility of developing key indicators of audit quality and effectiveness
and requiring auditing firms to publicly disclose these indicators." 8 The discussion of
4
note 3.
5
In this release, the term "public company" is used in place of the more
technical term "issuer," in section 2(a)(7) of Sarbanes-Oxley, 15 U.S.C. 7201(a)(7).
6
Committee also recommended that the Board should monitor the indicators that it found
to be feasible. Id. at 16-17.
9
Id., at VIII: 14-15. The Board held its first discussion of the feasibility of
developing AQIs with its Standing Advisory Group in late October 2008, several weeks
after release of the Treasury Advisory Committee Report. The project was deferred
thereafter, and it was reopened by the Board in late 2012. See supra note 2.
10
See, e.g. Section 10A(k) of the Securities Exchange Act of 1934 (the
"Exchange Act"), 15 U.S.C. 78j-1k, and Rule 210.2-07 of Regulation S-X, 17 CFR.
210.2-07 which require the auditor to report to the audit committee (i) all critical
accounting policies and practices to be used in the audit, (ii) all alternative treatments of
financial information within General Accepted Accounting Principles ("GAAP")
discussed with management, their ramifications, and the treatment preferred by the
auditor, and (iii) other material written communications between the auditor and
management, such as any management letter or schedule of unadjusted differences.
See also Auditing Standard No. 16, Communications with Audit Committees, which
requires the auditor to communicate to the audit committee, among other things, the
following matters: (i) the overall audit strategy and timing of the audit, (ii) significant risks
identified by the auditor, (iii) timely observations arising from the audit that are
significant to the financial reporting process, (iv) critical accounting practices and
policies, (v) critical accounting estimates, and (vi) qualitative aspects of the company's
significant accounting policies and practices.
12
As noted above, the efforts of the Board are all aimed, directly or
indirectly, at audit quality. Audit regulators in other parts of the world are also part of a
All three of the initiatives are discussed in the Board's Strategic Plan for
2014-2018.
See Public Company Accounting Oversight Board, Strategic Plan:
Improving the Quality of the Audit for the Protection and Benefit of Investors, 2014
2018 at 10-12, 15, 18 (Nov. 2014), http://pcaobus.org/About/Ops/Documents
/Strategic%20Plans/2014-2018.pdf. See also, paper prepared for the Meeting of the
Standing Advisory Group of the Public Company Accounting Oversight Board (June 2425, 2014), http://pcaobus.org/News/Events/Documents/0624252014_SAG_Meeting/
06242014_AQI.pdf.
16
A classic academic definition speaks of "audit quality" as "the marketassessed joint probability that a given auditor will both (a) discover a breach in the
client's accounting system, and (b) report the breach." Linda E. DeAngelo, Auditor Size
and Auditor Quality, 3 J. Acct. & Econ 183 (1981).
The U.S. Government Accountability Office ("GAO") (then named the General
Accounting Office) provided a more detailed definition in a study of auditor rotation
required by Sarbanes-Oxley, one that incorporated more directly the standards for the
conduct of an audit in footnote 14:
[A quality audit is an audit conducted] in accordance with generally accepted
auditing standards (GAAS) to provide reasonable assurance that the audited
financial statements and related disclosures are (1) presented in conformity with
GAAP and (2) are not materially misstated whether due to errors or fraud. This
definition assumes that reasonable third parties with knowledge of the relevant
facts and circumstances would have concluded that the audit was conducted in
accordance with GAAS and that, within the requirements of GAAS, the auditor
appropriately detected and then dealt with known material misstatements by (1)
ensuring that appropriate adjustments, related disclosures, and other changes
were made to the financial statements to prevent them from being materially
misstated, (2) modifying the auditor's opinion on the financial statements if
appropriate adjustments and other changes were not made, or (3) if warranted,
resigning as the public company's auditor of record and reporting the reasons for
the resignation to the SEC.
GAO, Required Study on the Potential Effects of Mandatory Audit Firm Rotation, GAO04-216, note 14, at page 13 (November 2003),
http://www.gpo.gov/fdsys/pkg
/GAOREPORTS-GAO-04-216/content-detail.html.
18
19
AUDIT PROCESS
AUDIT PROFESSIONALS
Competence
Focus
Tone at the Top and
Leadership
Staffing Leverage
Partner Workload
Manager and Staff Workload
Technical Accounting and Auditing Resources
Persons with Specialized Skill and Knowledge
Experience of Audit Personnel
Industry Expertise of Audit Personnel
Turnover of Audit Personnel
Amount of Audit Work Centralized at Service Centers
Training Hours per Audit Professional
Audit Hours and Risk Areas
Allocation of Audit Hours to Phases of the Audit
Results of Independent Survey of Firm Personnel
Incentives
Independence
Infrastructure
Monitoring and
Remediation
16.
17.
18.
19.
20.
21.
Financial Statements
AUDIT RESULTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
22.
23.
Internal Control
Going Concern
Communications
between Auditors and
Audit Committee
Enforcement and
Litigation
24.
25.
26.
Appendix A (which should be read together with this section of the release),
describes the objective of each indicator, discusses briefly the reason for its inclusion,
and contains possible calculations for the indicator at both the engagement and firm 21
levels. In the case of one (indicator 7) calculation is suggested only at the engagement
level because the scale of an audit firm practice could make generation of meaningful
20
b)
c)
d)
e)
b)
c)
Question 15. What are the elements of "context" required for successful
analysis of the 28 potential AQIs? Are those elements ordinarily available
to AQI users? If not, is it feasible to make the elements of context
available?
Question 16. Comparability.
a)
b)
c)
d)
Identifying promising indicators is only the first step. For AQIs to help turn a
clearer view of audits into increases in audit quality, people who influence audit quality
must use them in their decision-making.
An AQI project can take different shapes for the future, depending on choices
among a number of variables. These include (i) the potential users involved, (ii) the
options for obtaining and distributing the relevant data, (iii) potential approaches to
phasing in AQIs (so that, for example, not all data would be available immediately), and
(iv) exclusion of certain audit firms or types of audits from the effort, at least initially, if
relevant indicators are not adequately scalable. Again, choices in any of these areas
could naturally change with experience.
Users of AQIs: The Board believes that the potential primary users and
range of uses of AQIs can be summarized as follows:
Audit Firms
Investors 22
Other users of AQIs could include company management, the business press,
academics, and the general public. As noted above, the indicators are intended to
function as a balanced portfolio, and the initial assumption is that the portfolio would be
the same for all users. (Experience and research, however, may indicate the benefits of
modifying the group for situations where scalability or the nature of particular audits is a
consideration.) Different classes of users could receive different levels of disclosure of
AQI data.
Audit Committees. Independent audit committees of the boards of directors of
listed companies are directly responsible by statute or regulation for the appointment,
level of compensation, and oversight of their companies' auditors (including resolution of
disputes between the auditors and management concerning financial reporting), and
those auditors report directly to the audit committee. 23 Audit committees for all (listed or
22
Investors could only use AQI information if, when, and to the extent that
information is made publicly available. See the discussion infra at page 27. But of
course use of AQI data by audit committees to produce higher quality audits can benefit
the investors in the companies involved.
23
See Section 10A(m) of the Exchange Act and Exchange Act Rule 10A3(b). Foreign private issuers are exempt from these requirements if their home country
law requires their having an independent "board of auditors," with roughly similar
authority, and some other listed companies primarily passive investment vehicles, are
also exempt. See 17 CFR 240.10A-3(c)(6). Rule 32a-4 under the Investment Company
See Section 10A(h)-(k) of the Exchange Act, Regulation S-X Rule 201(c)(7) and Auditing Standard No. 16, supra note 11.
25
26
Auditing Standard No. 16, supra note 11. The Standard is effective for
audits of fiscal years beginning on or after Dec. 15, 2012. The release that
accompanied approval of AS 16 by the Board states that "Auditing Standard No. 16
does not preclude the auditor from providing additional information to the audit
committee. Nor does the standard preclude the auditor from responding to audit
committee requests for additional information from the auditor." See PCAOB Release
No. 2012-004.
29
30
31
inspection.
32
Data obtained from Audit Analytics indicates that 90 percent of the public
companies on the Russell 3,000 list as of April 2014 submitted at least one auditor
ratification proposal to shareholders between 2011-13. In its 2008 Report, the Treasury
Advisory Committee noted that "[a]lthough not statutorily required, the majority of public
companies in the United Statesnearly 95% of S&P 500 and 70%-80% of smaller
companiesput auditor ratification to an annual shareholder vote." Report of the
Treasury Advisory Committee, supra note 8, at VIII: 20.
33
See infra note 41. The Investor Advisory Group is a forum for the investor
community to provide its views and advice on matters affecting investors and the work
of the Board.
The AQI information envisioned by this release comes most importantly from
audit firms. The data for 19 of the 28 potential indicators can be obtained only from the
firms (or, in one case, from an independent survey of firm personnel); the data for eight
of the nine remaining indicators (the "audit results" indicators, indicators 21-28) can be
derived from public sources, while the remaining potential indicator is a possible survey
of audit committee members. Information about background and context must also
generally come from the firms, who are in the best position to provide it for firm and
client industry indicators and for indicators relating to particular engagements. (As
experience with AQIs grows, third parties, including academic researchers, may
assume a role of assembling, analyzing and providing perspective for AQI information
that is public, as is already done for, e.g., financial statement restatements for errors.
The Board and other regulators could also analyze the indicators and provide context,
subject to applicable disclosure limitations.)
Others could be involved in distributing AQI data, even if firms are the source of
that data and much of the accompanying context. Data aggregators might collect and
publish AQIs derived from public information. Companies or audit committees could
include engagement-level AQIs (and perhaps firm-level AQIs, for context) in their
financial filings or audit committee reports to shareholders, as some do now to a limited
extent.
The Board could take one or more of several approaches to assisting in the
distribution of the data. For example, as and when appropriate as the AQI project
matures, it could (i) encourage firms and engagement teams voluntarily to discuss AQI
engagement- or firm-level data with audit committees, or to do so publicly, (ii) require
audit teams to provide that data to audit committees, (iii) collect and make "combined"
AQI data public over time, as a single set of weighted figures for comparable firms, (iv)
collate and make public on a firm-by-firm basis AQIs derived from public sources, and
(v) consider requiring reporting of the necessary data to the Board so that the Board
could make it public, or even require firms to do so directly. (Of course, the strength of
any approach, at the stage of the project involved, as well as any legal or other issues,
would have to be examined at the time.)
The CAQ suggests this approach in its paper on audit quality indicators.
See Center for Audit Quality, CAQ Approach to Audit Quality Indicators (2014) at 6,
available at http://www.thecaq.org/docs/reports-and-publications/caq-approach-to-auditquality-indicators-april-2014.pdf?sfvrsn=2.
The optimal scope for an AQI project is also an important issue; its consideration
raises three broad questions. The first is whether the project should extend to all, or
only some, registered accounting firms. The Treasury Advisory Committee suggested
that one of the uses of AQIs could be to "enhance . . . the ability of smaller auditing
firms to compete with larger auditing firms . . . ." 37 But evaluations of AQI data likely
need to consider differences in results in relatively larger and smaller firms, respectively,
and the ramifications of those differences.
Issues of scalability such as these are complex. The Board may need to
consider whether the management of a smaller firm is sufficiently different than the
management of a large firm that some AQI's are not as relevant for one type of firm as
the other, and how to create meaningful measures of quality for firms of significantly
different sizes. The Board could decide, for example, to focus the AQI project initially
on the largest audit firms, who audit the financial statements and internal control over
financial reporting of most of the nation's public companies (in terms of market
capitalization). This approach will provide more time to study scaling of the indicators,
but it may also limit the benefits for the excluded firms and their public company clients
and encourage the market to differentiate between firms solely by size (because AQIs
begin to apply to larger firms first) rather than audit quality.
The second question of scope facing the Board is which public company audits
should be reflected in indicator data. As discussed above, only listed companies are
required to vest auditor selection, compensation, and oversight in independent audit
37
b)
c)
d)
Question 33. Should the Board consider steps to require audit firms to
make engagement- and firm-level AQI data available to audit committees?
To investors?
Question 34. Should distinctions be made, in the timing or nature of
AQIs, among the audit firms that audit more than 100 public
companies? 40 What potential distinctions would be most useful?
Question 35. Should smaller audit firms be treated differently than large
ones in designing an AQI project? What would small mean for this
purpose? Having less than a certain number of auditors? Auditing 100 or
fewer public companies per year and not being part of a global network of
firms?
Question 36. Should the size of the audited company set a limit on initial
application of an AQI project? What would an appropriate size be?
Should the fact that a public company is not a listed company affect the
way AQIs apply to it?
40
For 2014, nine U.S.-based firms audited more than 100 public companies:
BDO USA, LLP, Crowe Horwath LLP, Deloitte & Touche LLP, Ernst & Young LLP,
Grant Thornton LLP, KPMG LLP, MaloneBailey, LLP, McGladrey LLP, and
PricewaterhouseCoopers LLP See http://pcaobus.org/Inspections/Pages/default.aspx.
Sarbanes-Oxley requires the Board to inspect annually "each registered public
accounting firm that regularly provides audit reports for more than 100 issuers [i.e.,
public companies]. See Section 104(b)(1)(A) of Sarbanes-Oxley.
V.
a)
b)
c)
d)
In formulating the ideas reflected in this release, the Board and staff have
engaged in a broad project of outreach, speaking with representatives of a number of
interested parties, as the Treasury Advisory Committee suggested. They have met
several times with the Board's Standing Advisory and Investor Advisory Groups; 41 the
first of those meetings involved an extensive review of potential AQIs that helped guide
41
44
Federal Audit Oversight Authority FAOA, Activity Report 2013 (2014), 2425, available at http://www.revisionsaufsichtsbehoerde.ch/bausteine.net/file/showfile.
aspx?downdaid=7814.
46
The Board will seek comment for a 90-day period. Interested persons are
encouraged to submit their views to the Board. Written comments should be sent to the
Office of the Secretary, Public Company Accounting Oversight Board, 1666 K Street,
N.W., Washington, D.C. 20006-2803. Comments may also be submitted by e-mail to
comments@pcaobus.org or through the Board's website at www.pcaobus.org. All
comments should refer to PCAOB Rulemaking Docket Matter No. 041 in the subject or
reference line. Comments should be received no later than 5:00 p.m., Eastern
Standard Time, on September 29, 2015. The Board will consider all comments
received.
The Board will also convene a roundtable meeting in Washington, D.C., during
the fourth quarter of 2015, about this Concept Release. Additional details about the
roundtable will be announced at a later date.
48
Center for Audit Quality, CAQ Approach to Audit Quality Indicators (2014),
supra note 36.
Firm Level
Firm Level
Average chargeable hours managed
by public company audit engagement
partners for all public and private
clients for the current year (planned)
and prior year (actual)
Public company audit engagement
partners'
average
utilization
percentage for the current year
(planned) and prior year (actual)
c. Audit
engagement
partner's
utilization percentage 3 for the current
year (planned) and prior year (actual)
Heavy workloads could distract an engagement partner from giving adequate
and focused attention to an audit engagement. The figures generated by this indicator
can help bring that issue to light and aid understanding of the implications of division of
a partner's attention among several audit clients and competing client deadlines. (In
addition, the data can provide perspective on the leverage calculation if it shows, for
3
and
audit
Firm Level
staff, a.
a.
b.
The greater the workload, the greater the risk staff may have insufficient time to
perform appropriately the necessary audit procedures and take the other steps that
create a quality audit. Staff may become less effective when working long hours, and
such an environment may affect the level of due professional care they exercise. For
example, a heavy workload may create pressure on the staff to focus more on efficiency
in executing auditing procedures than on ensuring the effectiveness of those
procedures and of supervision of more junior engagement team members.
In applying this indicator, measurements may be made on a person-by-person
basis in the case of relatively small audit firms but on an average basis for larger firms.
Firm Level
An audit firm's technical accounting and auditing (e.g., national office) resources
(or their equivalent) can enable it to deal with complex questions during an audit. The
measurement in this indicator provides a sense of a firm's capacity to resolve complex
accounting and auditing issues in an effective way. It may also provide a sense of
whether and how a firm promotes consultation and collaboration with others for the
benefit of audit quality.
Question 45. How should technical accounting and auditing resources be
measured in a situation in which those resources are retained from
outside the firm conducting the audit?
5.
Persons with Specialized Skill or Knowledge. This indicator measures the
use in an audit engagement of persons with "specialized skill and knowledge," other
than accounting and auditing personnel counted as technical accounting and auditing
resources under indicator 4. These individuals may be firm personnel or they may be
retained by the firm. 5
Firm Level
Firm Level
Firm Level
Firm Level
Firm Level
The degree to which work on the audit is carried out at service centers can be an
important element in audit quality. Centralizing audit work at service centers here and
abroad widens the geographic scope of the audit partner's supervision and review
responsibility.
Centralization of this sort can have a positive impact. It may concentrate
processing of audit work in the hands of people skilled in that processing and, by doing
so, may free experienced engagement personnel to focus on more complex or
judgmental areas of the audit.
On the other hand, centralization may introduce risks of insufficient or ineffective
communication among engagement team members and create obstacles to effective
supervision and staffing, for junior auditors especially. Centralization can also limit
junior auditors' exposure to basic audit processes and could reduce the ability of firms to
train their staffs about those processes, weakening the model under which staff auditor
training has historically taken place.
Centralizing audit work means assigning lower risk audit work to domestic
or foreign service centers established by the firm conducting the audit.
Firm Level
Firm Level
a. Total
chargeable
hours,
and a. For audits by industry, computed
percentage of hours, by significant risk
separately, average chargeable hours
10
area for partners, managers, audit
overall and by significant risk area for
staff,
technical
accounting
and
partners, managers, audit staff,
auditing
resource
personnel,
technical accounting and auditing
specialists, and the engagement
resource personnel, specialists, and
quality reviewer, respectively, for the
the engagement quality reviewers,
current year (planned) and the prior
respectively, for the prior year (actual)
year (actual)
Measuring the hours that levels of an audit team devote to risk areas can
suggest whether audit managers have staffed the audit appropriately to reflect the risk
areas identified during the planning phase of the audit and the extent to which senior
members of the team have focused sufficiently on those areas. The data produced by
this and the following indicator should complement the picture of senior-level attention
to audit supervision created by indicators 1 through 3.
Measuring hours that other engagement teams from the same audit firm devote
to risk areas in audits of other public companies in the same industry as the
engagement client may provide grounds for a greater understanding of the nature of the
risks the firm identifies in audits of that industry, how it staffs to deal with them
generally, and the degree of focus its audit teams give them. This is another situation in
which context may be very important: different companies in the same industry may
present different risks due to, for example, systems, people, or process issues at one or
more of those companies.
10
Firm Level
a. Current year's (planned) and prior a. Percentage of hours of the firm devoted
year's (actual) total chargeable hours
respectively to planning, quarterly
for each related audit phase (i.e.,
reviews, interim field work, final field
planning, quarterly reviews, interim
work up until report release date, and
post-field
field work, final field work up until report
work
until
audit
release date, and post-field work until
documentation completion date for
audit documentation completion date)
partners, managers, the audit staff,
for partners, managers, the audit staff,
technical resources staff, specialists,
technical resources staff, specialists,
and engagement quality reviewers
and the engagement quality reviewer,
respectively
Audit quality depends in part on proper planning and execution and on the way
the overall audit hours are phased to construct a successful process. The amount of
time allocated to planning for the audit can be critical, and it can be equally important
who participates in the planning process. The same is true with the other stages of the
process.
Question 54. Does the "percentage of hours" metric at the firm level of
this indicator provide a meaningful basis for comparison with the
engagement level of the metric? Would it help to disaggregate the
numbers by audit client size?
Question 55. Is there any way to expand this indicator to quantify audit
personnel experience with audit clients, to provide additional context?
AUDIT PROCESS
Tone at the Top and Leadership
13.
Results of Independent Survey of Firm Personnel. This indicator measures
an audit firm's "tone at the top" through use of a survey tool.
Firm Level
a. Anonymous independent 11 surveys of current and
former firm personnel about "tone at the top," quality
of supervision and training, and the extent to which
the firm promotes an environment that favors
speaking up about potential issues, and promotes
and rewards professional skepticism
None
An appropriate "tone at the top" and the way the firm communicates and stands
behind that tone is generally essential to foster professional skepticism, objectivity, and
independence in the firm's personnel. Data from anonymous independent surveys of
audit firm personnel could provide unique insights about staff perceptions of their firm's
commitment to critical elements of quality. 12
Question 56. Who should administer the survey described in this
indicator? What steps would be necessary to assure that the results of
anonymous surveys were comparable? Would the same set of questions
be necessary? Would the same individual or organization have to
administer each of the surveys?
Question 57. How often would a survey of this type have to be
administered to retain its validity?
Question 58. What other logistical issues might arise from a survey of
this sort?
Incentives
14.
Quality Ratings and Compensation. This indicator measures the potential
correlation between high quality ratings and compensation increases and the
comparative relationship between low quality ratings and compensation increases or
decreases.
11
requested.
Comments on other ways to measure "tone at the top" are also specifically
Firm Level
a. Percentage of partners and managers, respectively,
with exceptional performance ratings on audit quality
b. Percentage of partners and managers, respectively,
with exceptional quality ratings who receive aboveaverage increases in compensation
c. Percentage of partners and managers, respectively
with low quality ratings
d. Average percentage compensation increase or
decrease for partners and managers, respectively, with
low quality ratings
Comparing internal firm quality ratings and compensation levels can provide an
important signal of the value a firm places on quality. This indicator would capture the
extent to which a firm's personnel evaluation process distinguishes among personnel at
each level of the firm based on audit quality and awards compensation accordingly.
Linking compensation to quality may provide strong evidence of the firm's commitment
to that goal and may create equally strong incentives for audit personnel.
Question 59. Can this indicator be applied to produce comparability
among firms, e.g. in terms of definitions of "exceptional performance
ratings" and "low quality ratings"? How?
15.
Audit Fees, Effort, and Client Risk. This indicator provides insight into the
relationship between engagement or firm audit fees and hours, on the one hand, and
levels of client risk, on the other.
Illustrative Calculations:
Engagement Level
Firm Level
a. Percentage change from prior year a. Percentage change from prior year in
in each of: (i) audit fees and (ii)
each of: (i) total audit revenues charged
chargeable hours for partners and
to public company clients and (ii)
managers, respectively, together
chargeable hours for partners and
with whether client was identified
managers, respectively, together with
by firm as high risk.
percentage of firm's public company
clients assessed as high risk.
Firm Level
a. Percentage
of a. Percentage of firm personnel subject to firm's
engagement personnel
personal independence compliance reviews
subject
to
firm's
annually.
personal independence
compliance reviews.
b. Average of mandatory independence training
hours per audit employee and other firm
b. Average of mandatory
professional employees covered by Commission
independence training
independence rules (whether or not involved in the
hours per engagement
firm's audit practice), respectively
team member
c. Percentage of issuer audit engagements subject to
firm internal quality control reviews over
independence compliance annually.
d. Level of investment in centralized support for, and
monitoring of compliance with, independence
requirements per 100 public company audit clients
(for firms with 500 such clients)
e. Percentage of public company audit clients lost
due to independence violations.
Firm Level
Firm Level
13
PCAOB inspection results and audit firm internal quality review results are
counted as audit process indicators, but they possess elements of both audit process
and audit results indicators.
Firm Level
a. Results
of
any
PCAOB a. Number and percentage of PCAOBinspections of audits of the
inspected audits that result in a "Part I
engagement issuer as well as
finding"
the number and nature of any
Part I findings identified
b. Number and percentage of PCAOB
inspected audits that result in more than
one "Part I finding"
c. Number and percentage of PCAOB
inspected audits that led to a restatement
d. Number, nature, and dates of quality
control defects dealt with in released Part
II PCAOB inspection reports (and dates of
such releases), if any, combined with
information about firm's subsequent
remediation efforts
The Board's own inspections focus on whether audits are conducted in
accordance with the Board's rules and standards. They can provide insight, in their Part
I findings (and any quality control defects, described in Part II of an inspection report,
that becomes available if adequate remediation by firms with quality control defects
does not occur), about breakdowns that may cause audit deficiencies. Public inspection
findings may provide a baseline for evaluating other indicators (e.g., comparing staff
utilization rates, or use of persons with specialized skill and knowledge, with inspection
findings) and testing the efficacy of firms' internal quality control systems.
20.
Technical Competency Testing. This indicator seeks to measure the level of
technical competence of a firm's audit personnel, and the success of efforts to keep up
that level of competence.
14
Firm Level
a. Content requires study
Audit firms recognize that technical competence is critical for maintaining quality
in a rapidly changing business and financial environment. But there is at present no
recertification examination for auditors, as there is, for example, for medical specialties
in some states and for most members of the securities industry. State boards of public
accountancy typically impose continuing education requirements but do not require
retesting.
Comment is specifically requested on ways audit firms might measure technical
competence, encourage its development and maintenance, and report on the result.
AUDIT RESULTS
Financial Statements
21.
Frequency and Impact of Financial Statement Restatements for Errors. This
indicator measures the restatements for error of financial statements whose audit the
audit firm has performed.
Illustrative Calculations:
Engagement Level
Firm Level
Firm Level
a. Content requires study
Given the historical harm to investors from fraudulent financial reporting and
auditors' responsibilities to help prevent or detect fraud that materially affects financial
statements, 15 one or more AQIs on the auditor's work in the fraud area may be useful.
Although the content of specific AQIs requires further study, ideas include:
Positive indicators:
15
1.
2.
2.
Developing AQIs related to these ideas is challenging. Data needed for the AQIs
may be difficult to obtain as it would require determining whether an internal control
deficiency related to fraud prevention, or determining whether errors in financial
reporting, resulted from fraud or other financial reporting misconduct. Also, the AQIs
listed above could reflect the riskiness of an audit firm's client base rather than the
quality of the audit firm's work.
Question 66. Would one or more AQIs related to fraud and other
financial reporting misconduct be helpful to discussions of audit quality? If
so, what AQIs would best inform those discussions? How could the
challenges listed above be overcome?
23.
Firm Level
a. Content requires study
Identify specific AQIs related to financial reporting quality (i.e. specific AQI
measures)
2.
Firm Level
Firm Level
a. Same as firm level "a," but a. The number and percentage of audit reports
concerning audit reports for the
with no going concern reference in the year
engagement client
preceding an engagement client's financial
distress, e.g., bankruptcy, troubled debt
restructuring, troubled buyout, or bailout
b. The five largest issuers by market
capitalization from the above indicator
Failure to include a going concern paragraph within an audit report in the face of
an issuer's reasonably foreseeable business distress (whether the distress results in
bankruptcy, a technical default, or a troubled buyout or bailout) can indicate issues
about the effectiveness of the auditing involved. This measure captures the extent to
which an audit firm identifies on a timely basis companies whose ability to continue as a
going concern is subject to substantial doubt.
All the same, any indicator focused on going concern issues can raise issues of
context and unintended consequences. Business difficulties are not always reasonably
16
Paragraph 2 of Auditing Standard No. 5 and Exchange Act Rules 13a15(f) and 15d-15(f). Paragraph 2 of Auditing Standard No. 5 provides that "[i]f one or
more material weaknesses exist, the company's internal control over financial reporting
cannot be considered effective," citing to Item 308 of Regulation S-K.
Firm Level
a. Anonymous independent 17 survey of audit
committee members overseeing one or more of a
firm's audit engagements, to evaluate level and
quality of communication between auditors and
clients
None
17
18
Firm Level
Firm Level
The frequency, nature, magnitude, and results of private litigation against audit
firms might reveal either weaknesses or strengths of a firm's public company practice.
Again, the information generated by this indicator may include quality issues affecting
either particular firms or auditing in general. But the quality of the information is
uncertain, given the fact that a particular litigation may or may not result in findings of
liability, and the amount of information derived from settled litigation is ambiguous.
Question 73. Should tabulation of cases for purposes of this indicator
include all cases filed or only cases that result in findings against an
accountant or accounting firm? What about settlements?